Luis v. RBC Capital Markets, LLC
| Decision Date | 13 October 2016 |
| Docket Number | Case No. 16-cv-00175 (SRN/JSM) |
| Parties | Gary and Caryl Luis, Stephanie Edwards and Murray MacLeod, Mary Moravec, and Judith and Delton Nack, individually and on behalf of all others similarly situated, Plaintiffs, v. RBC Capital Markets, LLC, Defendant. |
| Court | U.S. District Court — District of Minnesota |
Charles E. Scarlett and Scott D. Hirsch, Scarlett & Hirsch, P.A., 7777 Glades Road, Suite 200, Boca Raton, Florida 33434, Daniel E. Gustafson, Daniel C. Hedlund, David A. Goodwin, and Eric S. Taubel, Gustafson Gluek PLLC, 120 South Sixth Street, Suite 2600, Minneapolis, Minnesota 55402, for Plaintiffs.
Alex J. Kaplan, Andrew W. Stern, and Rituraj K. Ghai, Sidley Austin LLP, 787 Seventh Avenue, New York, New York 10019, Clifford M. Greene and Sybil L. Dunlop, Greene Espel PLLP, 222 South Ninth Street, Suite 2200, Minneapolis, Minnesota 55402, for Defendant.
This action arises from allegations that Defendant RBC Capital Markets, LLC ("RBC") improperly marketed and sold certain investment products to Plaintiffs between January 1, 2008 and the present date, in violation of Minnesota statutory and common law. In response, RBC now moves the Court to dismiss the Complaint, arguing that Plaintiffs' claims are precluded by the Securities Litigation Uniform Standards Act of 1998 ("SLUSA"), or, in the alternative, that they are pleaded with insufficient particularity to meet the heightened standards of Fed. R. Civ. P. 9(b). For the reasons set forth below, the Court agrees with RBC that Plaintiffs' claims are barred by SLUSA. Accordingly, RBC's Motion to Dismiss [Doc. No. 21] is granted in part, and denied as moot in part, and Plaintiffs' Complaint [Doc. No. 1] is dismissed.
Plaintiffs in this matter are seven retired and semi-retired individuals who invested in proprietary reverse convertible notes ("RCNs") sold by RBC, and suffered significant losses when those notes declined precipitously in value. (Compl. ¶¶ 13-17.) They commenced this action on behalf of themselves and the following putative class:
[A]ll persons and entities to whom Defendant sold [RCNs] from January 1, 2008 to the present, whose risk tolerance did not permit investment in reverse convertible notes and whose stated and written instructions to RBC did not authorize selling put options.
(Id. at ¶ 79.) Plaintiffs estimate that the putative class may ultimately consist of "several thousand" individuals. (Id. at ¶ 82.)
Defendant RBC is a Minnesota limited liability company and a registered broker-dealer, which acted as the agent for the sale of the RCNs underlying this dispute. (Id. at ¶17; Kaplan Aff. [Doc. No. 24], Ex. 1 at 5.)1 RBC is a subsidiary of non-party Royal Bank of Canada, which issued the RCNs. (Kaplan Aff., Ex. 1 at 2.)
At the heart of the Complaint is the allegation that RBC sold RCNs—complex structured securities that are "inherently risky"—to individuals who did not understand the nature of those investments, and who had previously indicated to RBC that they had a low tolerance for investment risk. (Compl. ¶¶ 1, 3-4.) Although the parties dispute the exact nature of RCNs, they are, at bottom, a form of bond, consisting of a high-yield, short-term note of the issuer that is linked to the performance of an unrelated reference asset—generally a stock or basket of stocks. (Compl., Ex. C at 2-3.) RCNs thus contain two components—a debt instrument paying an above market interest rate (occasionally as high as 30%), and a derivative, in the form of a put option, "that gives the issuer the right to repay principal to the investor in the form of a set amount of the underlying asset . . . if the price of the underlying asset dips below a predetermined price (often referred to as the 'knock-in' level)." (Id.) It is this underlying option that gives RCNs greater risk than a traditional bond, as an investor may ultimately lose all of his or her principal investment and be left with only a depreciated asset in return. (Id. at 3.) According to the Financial Industry Regulatory Authority ("FINRA"), the complex nature of RCNs can make them difficult to evaluate as an investment, and unsuitable for unsophisticated investors. (Id. at 2-3, 9-10.)
Because RCNs are so risky, Plaintiffs allege that RBC had a duty to only market them to investors who fully understood and accepted the risks involved. (Compl. ¶ 2.) In violation of this duty, however, the Complaint alleges that RBC engaged in a series of actions designed to hide the true risk of these products from investors, while pushing them on individuals who had expressly indicated an unwillingness to partake in options trading. (See, e.g., id. at ¶¶ 106, 118.) Several specific allegations are illustrative, including that RBC: (1) "intentionally failed" to screen customers to make sure RCNs comported with their stated investment goals (Id. at ¶ 36); (2) knowingly mislabeled RCNs as "fixed-income investments" on account documents provided to investors (Id. at ¶¶ 51, 106); (3) omitted important information regarding the volatility of the stocks underlying the RCNs (Id. at ¶¶ 60, 61, 63); (4) failed to follow its internal guidelines for marketing RCNs (Id. at ¶¶ 67, 68); and (5) had been the subject of legal and regulatory action relating to the allegedly improper marketing of RCNs, notice of which it failed to provide to investors. (Id. at ¶¶ 7-12, 65, 115.) Plaintiffs allege that they relied on these and other misrepresentations and omissions in purchasing RCNs, and that, as a "direct and proximate result of RBC's actions, omissions, and misrepresentations, [they] suffered enormous financial losses." (Id. at ¶ 123.)
The Complaint asserts seven individual claims against RBC stemming from the alleged inappropriate marketing of RCNs, all of which are founded in state law. Four of the claims (Counts 1, 4, 5, and 7) allege fraud in some form, including common law fraud, fraudulent concealment, and violation of two provisions of the MinnesotaSecurities Act (Minn. Stat. §§ 80A.68(1) and 80A.68(3)), which courts have recognized to be state-law analogues of SEC Rule 10b-5. See Merry v. Prestige Capital Markets, Ltd., 944 F. Supp. 2d 702, 709 (D. Minn. 2013); Minneapolis Emps. Ret. Fund v. Allison-Williams Co., 519 N.W.2d 176, 179 (Minn. 1994); 17 C.F.R. § 240.10b-5. The remaining claims (Counts 2, 3, and 6) are for common law negligence, breach of fiduciary duty, and breach of contract, respectively. With minor variations, the relevance of which will be discussed below, each of Plaintiffs' claims relies on the same set of allegations, including that RBC intentionally failed to follow customers' expressed instructions regarding investment risk, misrepresented the nature and safety of RCNs as investments, and omitted material information regarding legal and regulatory actions relating to RCNs. (See Compl. ¶¶ 95, 99, 103, 106, 108, 111, 115, 118-121.)
Under Rule 12(b)(6) of the Federal Rules of Civil Procedure, dismissal is warranted where a plaintiff "fail[s] to state a claim upon which relief can be granted." In evaluating a motion to dismiss, the court "must take the well-pleaded allegations of the complaint as true, and construe the complaint, and all reasonable inferences arising therefrom, most favorably to the pleader." Morton v. Becker, 793 F.2d 185, 187 (8th Cir. 1986). Although the complaint need not contain "detailed factual allegations," it must plead facts sufficient "to raise a right to relief above the speculative level." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). Thus, to survive a motion to dismiss, the plaintiff's "obligation to provide the grounds of his entitlement to relief requires morethan labels and conclusions." Benton v. Merrill Lynch & Co., Inc., 524 F.3d 866, 870 (8th Cir. 2008) (quotations and citation omitted). Rather, "the complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quotation and citation omitted). While ordinarily only the facts alleged in the complaint are considered in deciding a motion to dismiss, "materials attached to the complaint as exhibits may be considered," Morton, 793 F.2d at 187, as well as "documents whose contents are alleged in [the] complaint and whose authenticity no party questions, but which are not physically attached to the pleading." Kusner v. Beverly Enters., Inc., 317 F.3d 820, 831 (8th Cir. 2003) (quotation and citation omitted).
As previously noted, RBC contends that Plaintiffs' Complaint must be dismissed for two independent reasons. The first raised is that the each of the claims asserted in the Complaint is barred by SLUSA, which precludes2 maintenance—in either federal or state court—of any "covered class action" based on state law and alleging either (a) a "misrepresentation or omission of a material fact" in connection with the purchase or sale of a covered security, or (b) the use or employment of any "manipulative or deceptive device or contrivance" in connection with the purchase or sale of a covered security. See15 U.S.C. §§ 77p(b)-(c), 78bb)f(1)-(2). Proper application of SLUSA requires some understanding of its origins, which the Court will briefly recite here.
In the early 1990s, Congress became concerned with "perceived abuses of the class-action vehicle in litigation involving nationally traded securities." Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 81 (2006). In particular, legislative reports identified nuisance filings targeting "deep-pocketed defendants" in the financial industry as representing a serious threat to "the entire U.S. economy." Id. (quotation and citation omitted). The ability of these so-called "strike suits" to extract "extortionate settlements"...
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